Two-time finalist for Gerald Loeb Award - this year for Forbes magazine work and in 2010 for online commentary and blogging. I am a C.P.A. and freelance journalist with credits in the Financial Times, Boston Review, American Banker, Columbia Journalism Review, Accountancy Age, Accountancy Magazine, Forbes, and others. I also blog at my own site, re: The Auditors, a specialized news site about the business of the Big 4 audit firms. I have been quoted in the New York Times, Wall Street Journal, Chicago Tribune, Crain's Chicago Business, Chicago Magazine, Chicago Sun-Times, Financial Times, Reuters, Forbes, Harvard Business Review, BusinessWeek, American Lawyer, California Lawyer, American Banker, Columbia Journalism Review, The Times of London, The Guardian, the Financial Chronicle (India) and others. To reach me email fmckenna2010@gmail.com.

1/09/2012 @ 2:04PM18,696 views

The Neverending MF Global Story: Regulators Block The Truth

Joint statement of CFTC and SEC on November 1: “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”

When the trustees, the regulators, and the FBI finally stop looking under sofa cushions for the missing customer funds, they’ll have to start preparing lawsuits against third-parties. These potential “deep-pockets” include directors, JP Morgan, Jeffries, who underwrote the bond issue in August, and auditor PwC.

The Department of Justice will be forced to file criminal charges against someone.

What evidence will they base these lawsuits and criminal complaints on? Typically, a bankruptcy trustee hires a bankruptcy examiner to develop the theories and uncover the evidence used to hold executives, directors, bankers, underwriters, auditors and attorneys responsible for the failure of the firm and any fraud.

Instead, for MF Global we have a holding company trustee more intent on protecting MF Global executives and a broker/dealer Trustee who’s had to be pushed kicking and screaming to respond to customers.

So much, also, for an investigation by the broker/dealer bankruptcy trustee Giddens of what happened at MF Global by his law firm. Giddens’ firm is both customer and vendor to MF Global’s auditors, PwC and vendor to JP Morgan, MF Globals banker and biggest creditor. And so much for an investigation by the broker/dealer trustee that uses Ernst & Young as forensic accountants, the same firm, according to sources, that designed and implemented MF Global’s internal controls in time for their first Sarbanes-Oxley review and the same firm that Randy McDonald, the MF Global CFO prior to current CFO and PwC alumni Henri Steenkamp, came from.

If it was only the SEC abetting the obfuscation of helpful information, I’d maybe accept an excuse that the volume of filings from broker dealers precludes the detailed review of the content or SEC action on any information, such as discrepancies in controls over segregated assets noted by an auditor, until it’s too late.

But the CFTC, who seems to be using leaks to the press to deflect attention from its own role and responsibility for keeping an eye on customers’ money, is doing it, too. There is no data regarding status of segregated customer assets for MF Global on the monthly required regulatory report for FCMs posted by the CFTC for September, 2011.

I asked the CFTC:

“Did MF Global submit their data as an FCM for September on time within your required timeframe? If the CFTC received the data on time, why did the CFTC decide not to publish MF Global’s numbers as of September 30th? The full report was posted to the website on November 10, after the October 31 bankruptcy, but the data is “as of” September 30 when the firm was still in business.”

The CFTC spokesperson would not go on record with his response. Based on our conversation and the policies published on the CFTC ebsite of handling this report, I’ve determined that the September 30, 2011 financial statement filings for all FCMs, FCM/BDs, and RFEDs were originally due October 26th. The CFTC gives itself 12 business days after the due date to publish. It appears that organizations were given additional time due to the Veteran’s Day holiday. The Commission states that it “generally” publishes data for active FCMs only. MF Global Inc. declared bankruptcy October 31, 2011. At the time the September data was posted, MF Global Inc. was no longer an active FCM and, therefore, the firm and its data was deleted for the report.

Was there something about what MF Global reported for September regarding its required customer segregated funds position that in retrospect, post liquidation and holding company bankruptcy filing, would be embarrassing to the CFTC? Did MF Global report at all and on time? Did the CFTC have a head start on the MF Global situation that they did not act on?

We will never know since so much information that’s supposed to be public, transparent, and informative is being held back from the public, from investors, and from the MF Global customers still waiting to get their money.

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As a fellow Chicagoan (I am assuming from your pseudonym) you know we are the city of big shoulders, big mouths, and big ideas. I can shoulder any criticism, always speak my mind, and have a particular theory about what happened. I’ll be collecting plenty of wickedly strong drinks at Ceres if I’m right. :)

I assume that MF Global “legally” used their customer funds and that part of these funds were legally lost thru some form of pledging and re-pledging collateral. If so, then the gov agencies would want to delay and release this news slowly over several months to avoid criticism and investor unrest.

proposes that the customer assets were lost by pledging them as collateral for a short term loan – without any transfer of other assets to customer accounts – to make it through the weekend until a sale. When the sale did not occur because CME auditors could not be schmoozed any longer and missing assets were noticed, the bankruptcy occurred on Monday, the assets were liquidated by the lender, and they are thus totally gone.

If that was done, it would be an illegal, as in criminal, use of the assets.

Look at the July 31 statement on the CFTC. MF is the only FCM with negative net capital. Questioning of the CFTC should have been around the facts over that incident. How long did it take for MF to come back into compliance? Was that the only time they were non-compliant? etc…